Please fully explain this solution using a BAII plus Calculator. Your division i
ID: 2737928 • Letter: P
Question
Please fully explain this solution using a BAII plus Calculator.
Your division is considering two investment projects, each of which requires an up-frontexpenditure of $25 million. You estimate that the cost of capital is 10% and that theinvestments will produce the following after-tax cash flows (in millions of dollars):
Year Project A Project B
1 5 20
2 10 10
3 15 8
4 20 6
a. What is the regular payback period for each of the projects?
b. What is the discounted payback period for each of the projects?
c. If the two projects are independent and the cost of capital is 10%, which project orprojects should the firm undertake?
d. If the two projects are mutually exclusive and the cost of capital is 5%, which projectshould the firm undertake?
e. If the two projects are mutually exclusive and the cost of capital is 15%, which projectshould the firm undertake?f. What is the crossover rate?
g. If the cost of capital is 10%, what is the modified IRR (MIRR) of each project?
Explanation / Answer
a.
b.
c.
Project A Project B Year Cash flow Accumulated cash flow Year Cash flow Accumulated cash flow 0 -25 -25 0 -25 -25 1 5 -20 1 20 -5 2 10 -10 2 10 5 3 15 5 3 8 13 4 20 25 4 6 19 Regular payback Regular payback = 2+(10/15) = 1+(5/10) = 2.67 = 1.5 Regular payback is 2.67 years Regular payback is 1.5 years